WILL CHINA’S RECENT TIGHTENING OF LENDING RULES AFFECT THE PACE OF ECONOMIC RECOVERY IN THE U.S. AND SAN DIEGO?

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YES: But it’s not just China. Confidence in the global economic recovery is wavering after a jolting one-two punch (suggested tightening in the U.S. and China) that has driven both bond and equity markets down around the world. Central bank intervention is so widespread and deep that any indication of a change in policy sends markets into a tailspin. This reaction represents a lack of confidence in the “stand-alone” economy and is contrary to the “smooth landing” central banks promised. In light of the unexpected market reaction, central banks are backing off; the longer they postpone, the bumpier the landing.

YES: China surpassed the United States as the world’s leading exporter in 2009. America is currently third behind Germany. Combining both imports and exports, China also became the world’s largest trading nation as of February this year. As small consolation, the U.S. still leads in export of government debt. In 2014, China will likely overtake America to become the world’s largest importer as well. China is San Diego’s fourth-largest trading partner, with $908 million traded last year. Tighter lending requirements will probably limit some economic activity, but it’s uncertain how much impact that will have on the U.S. or San Diego.

YES: Growth in the Chinese economy has helped pull the global economy through the Great Recession. With growth, the Chinese have purchased more goods, ranging from consumer goods to industrial products. The United States, in particular, has benefited. Combined with a falling dollar that made American products less expensive, U.S. exports to China have surged, and that has helped boost the manufacturing sector in this country. A slowing Chinese economy would reverse this. San Diego would be affected, but to a lesser extent, as our trade with China is not as extensive as the rest of the economy. Tourism is one area that could feel an impact.

YES: The issue is not so much a deliberate Chinese policy as it is the potential fragility of the financial situation in China that was exposed when U.S. interest rates started moving up. As concerns about Chinese loans developed, interest rates there have spiked. That development raised interest rates further in the U.S. and around the world. These higher interest rates will slow the housing recovery that is under way in San Diego. If the Chinese economy weakens further, it would adversely impact a broad range of San Diego businesses.

NO: Since the U.S. fallout in 2008, when was the last time we heard that the recovery is being led by China exports? Never. Most of our recovery growth is domestically driven. China could impact our economy in the sense that they might not buy as many Treasury notes, but other global investors will substitute because U.S. Treasurys remain the only safe investment (for now). A slowdown in China could have welcomed benefits — already, steel prices (futures) have fallen. This could make the cost of construction cheaper in the U.S., which benefits the real estate business.

NO: Someday when China’s economy is larger than ours, it will be the case that when China sneezes, we may also catch a cold, just as Canada is affected by the U.S. economy. But today we remain fairly insulated from such minor tweaking as tighter lending rules in China. The European recession and EU problems are certainly more significant. Of greater concern is how will the real estate market handle much higher interest rates in the next year or so?